Aligning Taxable Profits and Accounting Profits: Accounting Standards, Legislators and Judges

Abstract

There has been an uneasy relationship between taxable business profits and accounting profits for many years. The radical changes currently taking place in the content and objectives of accounting standards, spurred on by the move towards International Accounting Standards, could be seen as an impetus for reviewing the tax position. These developments might be seen by some as an opportunity to use global accounting standards as a step towards harmonising the tax base, especially within the European Union. It is argued here, however, that the objectives of accounting standards are moving away from those of the tax system, making complete alignment between taxable and accounting profits inappropriate and identification of tax principles all the more important. It is widely agreed that, whilst the commercial accounts are a starting point for calculating taxable profits, there is a continuing role for tax legislation in providing for modifications in some cases to meet specific tax objectives. This article argues that, contrary to the views of many in the UK at present, there is also a multilayered and ongoing role for the courts in the process of defining taxable profits.

Keywords: Taxable profits, accounting profits, alignment

JEL Classification: H20, H29, M41, M44, M47